Add-on fees become an issue

When you’re raking in tens of billions in profits by helping credit-elite borrowers purchase homes, couldn’t you lighten up on fees a little for everyday folks who’d also like to buy?

That’s a question increasingly being posed to government-controlled home mortgage giants Fannie Mae and Freddie Mac and their federal regulators. Though most buyers are unaware of the practice, Fannie and Freddie — by far the largest sources of mortgage money in the country — continue to charge punitive, recession-era fees that can add thousands of dollars to consumers’ financing costs. This is despite the fact that the companies are enjoying record profits, low delinquency rates, rising home values, plus are protecting themselves from most losses with insurance policies paid for by consumers.

Critics say that by making conventional mortgages more expensive, these fees are partially responsible for declines in home purchases in recent months, especially among moderate-income, first-time and minority buyers. The add-on fees can raise interest rates for some borrowers from the mid-4 percent range to more than 5 percent. Since Fannie and Freddie operate under federal conservatorship and send their profits to the government, the fees amount to a federal surtax on homebuyers.

Last year, the two companies had combined net income of nearly $133 billion and pre-tax income of $64 billion. By contrast, the entire private mortgage industry — big banks, small banks, mortgage companies, brokers, servicers and others — had $19 billion in pre-tax income, according to new data compiled by the Mortgage Bankers Association.

Fannie and Freddie got into deep financial trouble acquiring and backing poorly underwritten loans during the boom years. But under regulatory supervision since 2008, they have improved their performances, primarily by severely tightening their credit standards.

As part of that effort, they created a series of fees known as “loan level pricing adjustments” designed to charge borrowers more if they have certain perceived risks. The fees generally are added to the base interest rate paid by borrowers.

Small down payments, for example, get hit with higher add-on fees than large down payments. Applicants with low credit scores are assessed much higher fees than those with pristine records. Buyers of condominium units who make down payments of less than 25 percent get charged a hefty extra fee no matter what their scores. Fannie and Freddie also charge lenders fees to guarantee mortgage bonds — again ladled onto borrowers’ bills — and those have doubled since 2011.

But critics such as Mike Zimmerman, senior vice president of MGIC, a major private mortgage insurance company that does business with Fannie and Freddie, calls the companies’ add-ons “arbitrary” and excessive in view of current market conditions. For some borrowers, he says, the fees can increase the monthly cost of a 5 percent down payment loan on a $220,000 house by up to 7 percent, and lead to thousands of dollars of extra expenses.

But since Fannie and Freddie are already insured against most losses on low down payment loans by private insurance policies, he argues, these add-ons are unnecessary, covering risks that are already covered.

Fannie and Freddie could save consumers a lot of money, say industry experts, by reducing or getting rid of the add-ons and deepening their mortgage insurance coverage. Zimmerman estimates that borrowers could see reduced interest rates of between one-quarter of a percent to nearly nine-tenths of a percent if the companies moved in this direction.

A spokesperson for the two corporations’ regulator — the Federal Housing Finance Agency — declined to comment on the issue of add-on fees. The agency has a new director, former North Carolina Democratic congressman Mel Watt, who has made virtually no public statements since he took over effective control of Fannie and Freddie in January. He is said to be studying options regarding key policy issues but is not ready to announce changes, if any.

David Stevens, CEO of the Mortgage Bankers Association, says the companies’ excessive fees are thwarting home purchases. “We’re seeing significant declines in purchase applications because we have priced out a lot of Americans,” especially in the under-$417,000 segment dominated by Fannie and Freddie.

“It’s a wonderful thing to be a duopoly,” said Stevens in an interview, but the two companies’ total fees are out of line with their real risks and are hurting homeownership.

Could all this change and borrowers get a break? It’s up to Watt and, at least for the time being, he is mum.

Kenneth Harney is executive director of the National Real Estate Development Center.